Transcription
Today, we're going to teach you guys how to make over $1.5 million building a simple little fourplex, and I'm going to also talk to you guys about how to get financing on that fourplex. I'm going to give you two different ways to obtain financing on that fourplex.
So now, look, one of the biggest things is how do you go out and build an asset and generate so much upside potential in financial revenue? And the thing is, is that you could sell this asset and generate hundreds of thousands of dollars in profits in less than 9 months.
Now, how this works is because it is still a residential asset. And I've always used the term "resume up." When we're talking about resuming up, it's about it's a bank term where you start at the bottom, like any job, like any career, like anything that you're going out and do, and you start building a portfolio, a resume of projects that you've done. And I always tell people, "Why not earn while you learn?"
So when you're going out, you're buying a piece of land, you're building a house, and you're generating profits, guys, profits in your very first year, where most businesses, 95% of them, fail within their first year. You can put $600,000, $700,000, $800,000, or more in gross revenue on your financial statement your very first year, and then take that with a $150,000 net profit if you follow our business model.
Now, when you do that, you have capital. And when you have capital, you can do things even with a small monetary amount of capital. Now, today, $150,000 to you might not sound like a small amount of monetary capital. It might sound like a whole hell of a lot. But when you start getting into the ground-up game, you start getting real estate, you start getting into business, you start scaling, money goes quick. And one of the biggest things, there's never enough bandwidth for capital, no matter how much you grow, because there's levels to this game.
But today, let's simply talk about a fourplex. Let's talk about how to build it, how to underwrite it, different ways to obtain financing, and multiple ways to be able to take advantage of the upside profit potential.
Now, let's take a look at a simple fourplex. Let's say, for sake of example, we want to go out and build this thing ground up. Now, I know it sounds like an undertaking, but it's not. It's the equivalent of building one home, guys. Here's how it starts.
Let's say that in our business model, I always tell people, build between 1,500 and 3,000 square feet because we build what people need, not what they want. Meaning, when times compress in a market like they are today, where interest rates go up, people are not going out buying an extra thousand square feet on their home. They're not putting an extra bay on their garage. They're not putting a game room and a man cave on their house. They're not going out and extending their bedrooms to exponential sizes with big walk-in closets and big vaulted ceilings. Guys, they're buying what they need to raise a family. So a nice 2,500 square foot house is what people need because you can make it a three-bedroom, four-bedroom house, and it's a nice, comfortable home, and you can raise a family in that home. So people will buy in market compressions what they need, not what they want.
So let's take a look at this from a perspective that you guys can palate. So I know that a lot of people that are watching our channel right now, when we sit back and we look at this, you're going, "I want to make some profits, Drome. I want us to come in and I want to be able to generate profits."
Now, a fourplex is just a simple residential property. When it gets to five units or greater, it becomes a commercial property. Now, the downside to a fourplex is you are reduced in your financing options because once you get into five units, you can get government-assisted loans like HUD loans, Fannie Mae, Freddie Mac. Those three are restrictive from four-unit apartments. Why? Because those are government-assisted loans that are for commercial lending only. And when you go in, you get those HUD loans, you need to have five units or more. But you can still get a VA loan, you could still get a government-assisted loan through a fourplex, just a different type. Now, conventional financing, we'll talk about that here in a moment.
But let's sit back and let's go back to what I was talking about, fixing flippers. Those of you guys that have been in the single-family ground-up game, for you guys to understand that a fourplex is no different than the undertaking of building one home, guys. It's one home. It's the exact same thing. And let me show you what I'm talking about.
So in our business model, I tell you guys, you can go in and you can build from 1,500 to 3,000 square feet. But if you're building what people need, not what they want, in a 2,500 square foot house, you could fit four bedrooms, you could fit three bathrooms, you could fit a nice living room, you can fit a nice kitchen. Now, here's the thing: is that house might be 2,500 square feet under air, meaning the air-conditioned area, right? You're not usually putting air conditioning in a garage, on a front porch, on a back porch. But this is the livable space within that area. But there is going to be a garage. And if it's a three-car garage, more than likely, it's going to be right around 900 square feet to 1,000 square feet. Okay? So let's say we have 1,000 square feet garage, then we have a back patio that's 400 square feet, and then let's say we have a smaller front patio when you come up to the entryway that's 200 square feet. Okay? That's 3,500 to 4,100 square feet altogether.
Now, if we do a simple fourplex, guys, let's say that every single unit in there, they're big, right? Most two-bedroom units are somewhere between 850 and 1,100 square feet. Let's take an average of that and let's take 1,000 square feet times 1,000 square feet. Now, if we take 1,000 square feet, that's the equivalent of 4,000 square feet on the build. No difference between a single-family home and a fourplex. The exact same undertaking goes into building a fourplex as goes into building a single-family home. But let me show you the difference in profitability because this house right here might be worth someplace right around $700,000. This place right here is going to be worth someplace in the neighborhood of about $1.5 million. Okay? Same amount of effort, same amount of lumber, same amount of undertaking, a couple extra toilets and a few extra kitchens, but profitability substantially higher. And we'll talk about financing here in just one minute.
Now, if we go in, let's talk about the value of this place, and then we'll figure out, can we afford to build it? Right? Like, does the value support what the cost to build is? So we go in, let's take a look at this from a perspective of value. Okay? So what is the value of this place? Now, I have an ARB, Arbitrage number of $1.5 million. I know if it's going to be worth that. Yeah, I have a feeling I know that it's going to be worth about $1.5 million. But how do we actually assess that? If you're an investor, you want to build a fourplex, how do you know exactly how much that asset is really worth?
Okay, so if we go in and we assess value, we say there's four units. Okay? We take four units. Now, if those units are $1,000 a month, the average rent with rubs and everything you're going to have, and let's make them nice units, guys, like it's a fourplex, right? Let's say for sake of example, if it's an owner-occupied fourplex, it's a residential property, and your bandwidth for financing even becomes better.
Now, here's the thing, guys. You might sit back and say, "Well, I don't want to live in my own fourplex. I'd rather rent it." Well, guess what? Go to the bank and consider living it because if you consider living it, financing becomes extremely simple compared to getting a commercial loan, and your bandwidth for down payment goes down substantially. And sometimes, after it's built, in spite of you going in and getting an owner-build construction loan, there's variables in life like COVID, the pandemic, the elections, whatever it is, there's life circumstances and variables that may not allow you to live there, quote unquote, when it's done. Now, that's an area that you go in to be able to assess on your own perspective on life to see if living there is worth its weight in value when getting finances.
But when we're looking at it from a value perspective, I want the rents. So even if I live there, I want to pay rent to my own entity, and I'll show you why, and you'll understand why in a second. So if you're living here, let's say that the rents on these are $2,500 per month. Okay? 1,000 square feet, $2,500 per month on rent. These are nice units, tile backsplashes in the kitchen, shower surrounds with tile backsplashes, about $115,000 of additional upgrades when building this asset, and it makes the values for the rents go up exponentially.
Now, we go in, $2,500. Now, let's get a calculator here. We take $2,500 times four, so that's $10,000 per month times 12. Okay? So that's $120,000 per year. Anytime we underwrite, it's annualized. We never underwrite unless it's annualized. So this is per year. Now, this is our gross income potential.
Now, one thing that we know is we're going to have vacancies. And so anytime we go in and we look at vacancies, we know that there's a 5% revolution in tenancy always. So if there's a 5% tenancy nationwide in multifamily, let's consider it to be exactly the same with our fourplex. We take $120,000 times .95 because we know that it's all going to be occupied 95% of the time. That means that we have a gross operating income equivalent to $114,000.
Now, when we look at this, guys, one thing that we're going to do is we're going to self-manage a fourplex. You're not going to get a management company to manage a fourplex for you. You may even be living in one of those units. But when you do, you want to pay yourself rent. So if this is under the Drome Maldonado LLC, and I have a separate entity for myself that manages that property, like Amazing Fourplex LLC, I'm going to pay a check from myself to my LLC called Amazing Fourplex LLC. And so when I do that, I'm still collecting rents. And the reason why is because of the value, guys. If you ever have to resell this asset, look what that $2,500 a month does to the value of this asset for resale purposes.
Now, when we go in, we have $114,000 in revenue every single year from this asset. Now, when we look at that, we have to look for our net operating income. Now, we have to subtract out all our expenses. One of the things that CBR, CB Richard Ellis, one of the largest real estate firms in the world right now, they said is that you can manage one of these properties, including insurance, property taxes, all expenses, even management fees, at about 20% per month. That means that all your expenses, leaky toilets, clogged toilets, site management, blowing all the leaves and stuff during fall, all of those expenses cost about 20% of your gross operating income. So that means that you have 80% of that left.
Now, if we take our expenses times 20% for expenses, our expenses are going to be $114,000 times .20, that's going to be $28,800 per month. So that equals a net operating income equivalent to $28,000 and expenses that are equivalent to $22,800. Okay? That's our expenses. Okay? Now, our net operating income is our gross operating income is our GOI minus expenses. So we do this, we need to find our net operating income at $114,000 minus, let's round it and call it $29,000. So that's going to give us a net operating income $4 minus $29,000, that's going to be $85,000. So that's going to give us an NOI, why $85,000 per year. Okay? That's our net operating income.
Now, when we look at our net operating income, guys, this is what's needed to assess value. Let's figure out what this fourplex is worth. How many of you guys want to figure out what this fourplex is worth? You guys want to just go in and just build it blindly? Because that's what most people do. They sit back and say, "Well, I'm going to build a fourplex and I hope that it cash flows. I hope that it works. I hope that this asset can go in and pay for itself." Stuff. Fun on hope, guys. Like one of my mentors once told me, he said, "If you spit in one hand and you hope in another, you're going to land up with an empty hand of hope and a handful of spit." Point being, they're both absolutely freaking worthless. So don't hope. Know. And the way you know is by figuring out value.
Now, value is equal to NOI divided by cap rate. Okay? Now, for those of you guys that don't know what a cap rate is, cap rate is your return on investment. It's like buying a stock. So if you go out and buy stock in Walmart and you say, "I'm going to make a 6% return on my investment with Walmart," because that's what Walmart pays out on average with its growth pattern, you don't know, right? Like the stock market is volatile. But let's say you make 6% that year, that is 6% return on investment is your cap rate. So if you pay cash for that asset a year, the cap rate is the amount of return you're making on that asset annualized.
So if we go in right now, cap rates have to run in alignment with interest rates because you can pay a 6% interest rate with a 4% cap rate, right? Like if you have a 4% return on investment, you can't afford to pay 6%. It's a 2% in the red. You have to have a cap rate that coincides. Now, here's what's cool. We can go in, we can buy down our rate. Let's call it a 5% cap rate. Okay? Right now, we're underwriting things at a 5% cap rate. Okay? So if we go in, we take $85,000 and we divide it by 5%. Remember, value equals NOI. NOI is $85,000 divided by 5%. The value of that asset is going to be $85,000 divided by .05 is $1.7 million, guys. The value of that asset.
Now, that's the value of our fourplex, guys. How many of you guys would love to be able to go in and in less than 9 months be able to go and make $1.7 million or have a gross annualized revenue of $1.7 million? This is a real value, guys, provided you're getting $2,500 a month in rents and you build those things out nice, 1,000 square feet. That's a $1.7 million asset that you have in less than a year, guys. One build for a residential build that's 2,500 square feet, grow square footage 4,100 square feet, 6 months you can build this fourplex in 6 months.
Now, with that said, you go in, you lease that up. Can we afford to build it? Like, what is it going to cost for us to build this 4,000 square foot fourplex? Okay? We know what it's worth, but can we afford to build it?
Okay, now, what I always say, a good rule of thumb for multifamily is $155,000 per door on the land. Now, because it's a fourplex, you're going to pay more than that. Let's say that you pay $25,000 per unit, that's $100,000. Heck, let's say that you overpay for the land. Let's say you pay $200,000 for. You only need about a quarter acre to build this thing or less.
So if we go in, let's assess cost to build. Now, we talk about cost to build, guys. We look at it from a perspective of construction. We have 4,000 square feet. Okay? One thing that we know is we're going to have the cost for the land. The land is the first very that we have. Now, if you guys haven't watched our video on how to buy land, build houses, you need to go back and you need to watch it. In fact, I'm going to go ahead and recommend a "Buy Land Build House" video at the beginning of this video that if you guys go back, watch, comment on it, #repeat, and that way we know that you went in and you've actually watched the video on how to buy land, build houses, because once you do that, you'll know the process.
The process of building houses is right here, guys. This is the process. The process of getting money. Money comes from having to design a house, the architecture on a lot that you can go out and get an appraised value from an appraiser, and the bank can utilize to assess the real value of that asset and give you money. That's how you get money, guys, is right here. The process. So if you haven't, go back, click, and subscribe that way you guys are always notified anytime we release a video like this that has mad value. And then that way, you can go in and get notifications of all the new content that's up and coming. And for those of you guys that missed that content, go back here on YouTube and then hit #great and rewatch the "Buy Build House" video to show you how to build 4,000 square feet.
Now, we go in and do this. We know that the land's going to cost us right around $200,000. Okay? So our land is equal to about $100,000 to $200K. Let's call it on the higher end, and we pay $200K. Well, how big is the lot? Got to be very small. You can build this on probably one-sixteenth to one-half acre.
When we go in, we know that there's going to be a cost to build. You can build this very efficiently, very effectively, and you can just build it all one ground level, or you could build it where it's two levels high. You can build two on the bottom, two on top, depends on the shape and size of the lot. What depicts whether you go two stories or one story? The shape of the lot. If the lot is short and narrow and you can't get your setbacks, if they all sit on the first floor, then you go up, you go vertical, and you build a two-story apartment complex with a staircase that goes up with a rail.
Now, when we do this, guys, we have 4,000 square feet. One thing that I know is that the average cost per build on single-family residential dwellings is about $41 per square foot right now, according to the National Association of Home Builders. Now, because we're going to build these nice, they're going to be upscale apartments, and because we know we're going to trim these out and probably have to hire a general contractor, let's say that these cost us $185 a square foot to build. So that's an additional $44 per square foot to enhance the quality of these. That's a large number, guys. $44 a square foot more. So $185 per square foot.
So we take $185 per square foot on cost to build. If we take 4,000 square feet times $185, that's going to be $740,000. That's our cost to build. This is what you need from the bank, guys. You're going to need $940,000. That's what you're going to need from the bank because most people don't have the $200,000 to buy the land.
Now, if you're buying land, building houses, and you do it under our business model, I got you back, baby. You know what I'm talking about. Now, you have $200,000. You've went out, bought land, built houses, and you made a net profit under our business model, following, not jacking things up, right? Not going out and reinventing the wheel and doing your own business model, you're following our business model that we've been doing for 28 years.
Now, when you do that, you can go in and when you go get lending, your first draw from the bank is going to be to pay for the land. So for those of you guys that are watching this for the first time saying, "Drome, I can't afford a $200,000 piece of land." If you can't afford it, you can't afford not to, because now we got to build you a $1.7 million asset, and now you can afford to. And so your mind shift has to change, your perspective has to change, the way that you understand lending has to change.
And I get it, ladies and gentlemen. Most people weren't taught this in school. They weren't even taught about conforming lending. We spend 13,000 hours in a broken-down school system that teaches us from kindergarten to 12th grade how to go out and understand when Christopher Columbus discovered America, or they're teaching us some about algebraic equations that you'll never freaking use unless you're setting a satellite on the moon, which most of us aren't ever going to do, right? And for those of you guys that are learning earth science, great, that's great. But how much does that teach you about money, finances, conforming lending, non-conforming lending?
Now, you can do straight-up conforming lending on an asset like this because it's a residential asset. It's only a fourplex, guys. A fourplex. So when you understand banks and lending, you understand that if you have an asset that's worth $1.7 million, and you're talking about this from a banking perspective, $1.7 million, how do you know that? Because you went through the process, you were able to get proformas, you know what the rents are in that area, you know what the value of that asset is because you have a set of plans to be able to function on. Now, the bank can appraise that asset. We know what our value is at $1.7 million. So when the bank comes in, they're saying, "We have a stabilized value of $1.7 million." Yeah, we have a million freaking dollars in equity in this thing when it's stabilized, provided we lend these guys $940,000 to build the asset.
Now, when we do that, ladies and gentlemen, there's also going to be what's called debt service. The reason I don't put this into the front end of our expenses is because the debt service on that asset is actually done through what's called an interest reserve. And so it's tallied up on the back end of the construction loan. You're actually able to pay it out of the proceeds of that loan.
So when you talk about debt service, how much is it going to cost us for a $940,000 loan? Well, let's say that it's expensive. Let's say the construction money today, which it is, very expensive, is sitting at about 11% interest. You can get that high and higher, guys. We typically will build these under construction loans at about 9%. Now, remember, this is a residential loan. A lot of times, the lenders will give you what's called a construction-to-perm loan, which means they'll give you a construction loan that automatically teeter-totters back into a permanent loan long-term. When you do that, and you get a construction loan to a perm loan, you can go in and get a better interest rate. So when you guys go in, ask your lender, say, "Hey, do you guys have an option for a construction loan to perm to permanent financing?" Okay? That's the term you use, meaning that you get a better interest rate because nobody's going to sit back, buy an asset like this, and pay 9% permanent financing for it. It's ludicrous. It's crazy. Nobody will do it.
But you know what they will pay? They'll pay 5%. And if you can go in and you can buy it down, always buy down your rate on the front end, guys. Once you've signed the docs and you've already solidified the payment, I'd rather go in and pay $50,000 to buy down my rate on the front end because now that $50,000 buy down in my interest rate is going to save me hundreds of thousands of dollars in mortgage payments and debt service over the course of time.
Now, when you go in and you do a construction-to-perm loan, they don't actually start charging you payments until you get a certificate of occupancy and you're living in the property or the property is leased. Now, with that said, they'll ask you, "How long do you think it'll take you to build this asset?" We know you and I, because you're following the process that we utilize, it'll take about 6 months to build this asset. But if you go for margin of error, you tell them 12 months. Now you have up to 12 months to stabilize this asset and go in and get a perm loan before an interest payment is even due.
Let's say that it's expensive, though. And let's say the construction money cost us 11%. Now, we take $940,000 times .11, that's going to be $13,000. Now, remember, it's only a six-month loan because we're going to go in and we're going to stabilize this asset. And they're not going to go in and dump $940,000 in your bank account. What they're going to do is they're going to give you draws based on the production of that actual asset. So your first draw might only be for $200,000. So the only thing you're paying interest on is the land.
Now, when you do that, you're going to go in and put lay a foundation. That foundation might cost you $40,000. So they'll give you another $40,000 on a draw for the foundation. When you do that, you're only getting charged the interest on not $940, but what you've actually drawn on. So a good rule of thumb when you're doing a construction bill is about 30% of the annualized amount. So times .3, your debt service is going to be about $31,000. Okay? So that's going to be a cost that is going to be incurred, but on the back end.
So our total cost to build and understand, guys, in the build cost, this includes what's called your soft cost and your hard cost. Your hard cost are the actual components to build it: the lumber, the nails, the roofing material, the drywall, the paint, the flooring, all of that is your hard cost. Now, the way I always remember what the hard cost is, soft cost is soft cost are the architecture, the engineering. This is soft cost. These are all the people that work in the office. You work in an office, you don't have calluses on your hand. Soft hands. Soft cost. Hard hands, swinging hammers, you're swinging nails, you're cutting boards, you have calluses on your hand. You're out in the field, you're working. Hard hands. Hard costs. So I always remember hard cost, soft cost based on the workmanship of what's getting done. In office, soft hands, soft cost. In field, hard hands, calloused, hard cost. Okay?
Now, our total cost to build, it's going to be $971,000. God, how are we sitting, guys? How are we sitting? We have a value of $1.7 million minus $971,000, that's an equity stance of $729,000. You could sell that asset and make $729K in equity or profit. If it took you one year to build this, guys, how many of you guys would love in 12 months to be able to go out, build a house, make $250,000, but then go in, build a fourplex, and generate a resale price that'll bury you $729,000 to ching, ching, ching, profits in your pocket? Fourplex, guys. And you get a residential loan on this. You can use straight-up conforming lending to be able to go out and build a fourplex, guys. And in less than a year, you can have a $729,000 profit. How is your business doing now?
Ladies and gentlemen, this is one of the most profitable assets you can build right now, and banks will lend on it. At a time in a day and age where lending is very restrictive, our economy on a macro level is crazy because of the presidency and all that's happening, politics right now, and the corruption that's happening. We could still go in and build a simple little fourplex and go in and bear a profit of $429,000 in less than 9 months. Guys, let's say it took you 6 months to build, 3 months to fill, and you go to sell that asset. Less than 12 months, you can make a $729,000 profit. A fourplex. We're not building 100 units. We're not building a bunch of crazy stuff. A little four-unit residential apartment complex.
Ladies and gentlemen, there is so much money in real estate. There is so much money at the edge of your fingertips. The issue isn't the profits. The issue is now you have to go in and build an 8-unit apartment complex because if you sell this, you have a tax liability that's going to cost you about $350,000. And the last thing you want to do is bear a profit of $729,000 and then have to give almost half of that to the IRS. Hell with the IRS. Go in, ladies and gentlemen, and go in and build this. Keep it. Cash flow from it. Profit from it. And if you sell it, resume up to an 8-unit apartment complex and continue compounding your success.
If you guys want more content just like this, click and subscribe to our YouTube channel. Give me some love, baby. Give me a little thumbs up and continue watching and compounding your success. We'll see you on the next one.